From March 1st, the long-delayed reverse VAT charge will be introduced for the UK’s construction and building industry. The new rules will have a major impact on how VAT is collected in the construction sector.
The new rules are an attempt by HMRC to eliminate “missing trader fraud”, which is seen as a major problem within construction. VAT fraud is estimated to cost the Treasury over £100 million annually.
Missing trader fraud refers to instances in which suppliers charge VAT, then shut their businesses without paying that VAT to HMRC. It is hoped that reverse VAT charge will end this kind of fraud in the construction industry.
In brief, the reverse VAT charge will affect all VAT-registered construction firms that supply services or goods. The new rules dictate that customers must now pay the VAT on these goods or services directly to HMRC, rather than the firm that is supplying them.
All payments for goods or services falling under the Construction Industry Scheme (CIS) will be subject to the new rules, this includes things such as construction, repair, civil engineering, demolition and certain installation jobs.
If the recipient is not registered under CIS or is not required to be registered for VAT, the services will be exempt from the reverse charge. Other exemptions include services rendered for “end users”, e.g. the owner of the property in question; services supplied within a group of companies, e.g. cases where the recipient then goes on to supply the service to another connected firm; and construction services supplied from a landlord to a tenant.
Understandably, the implementation of the reverse charge is going to have a considerable impact on a construction industry that is still recovering from the worst of the COVID-19 pandemic. In part two, we will look at what the impact might be.
Author: Steven English